Good morning, and thank you for standing by. Welcome to the Dorman Products Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Sir, please go ahead.

Thank you. Good morning, everyone. Welcome to Dorman's Fourth Quarter 2024 Earnings Conference Call. I'm joined by Kevin Olsen, Dorman's Chief Executive Officer; and David Hession, Dorman's Chief Financial Officer. Kevin will share updates on the business, and David will review the quarterly results and our guidance for 2025. Kevin will then close our prepared remarks before opening the call for questions. By now, everyone should have access to our earnings release and earnings call presentation, which are available on the Investor Relations portion of our website at dormanproducts.com. Before we begin, I'd like to remind everyone that our prepared remarks, earnings release, and investor presentation include forward-looking statements within the meaning of federal securities laws. We advise listeners to review the risk factors and cautionary statements in our most recent 10-Q, 10-K, and earnings release for important material assumptions, expectations, and factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. We'll also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our earnings release and in the appendix to this earnings call presentation, both of which can be found on the Investor Relations section of Dorman's website. Finally, during the Q&A portion of today's call, we ask that participants limit themselves to one question with one follow-up and to rejoin the queue if they have additional questions. And with that, I'll turn the call over to Kevin.

Thanks, Alex. Good morning, and thank you for joining our Fourth Quarter 2024 Earnings Call. As Alex mentioned, I'll start out with a high-level review of the results. I'll also cover the keys to our success and our strategic focus areas for 2025. Along with observations within each of our segments. With that, let me begin on Slide 3 with a few highlights from the year. Our financial performance in 2024 was outstanding. We surpassed the $2 billion of annual sales mark for the first time in our history, growing net sales by 4.1% year-over-year. This net sales growth was driven by strong demand in our light-duty segment which benefited from recently introduced new products. While market pressures weighed on the results of our other segments, specialty vehicle drove slight growth after a positive sales inflection late in the year, and heavy-duty invested in improving customer experience and new product development, which positions them well for when the market rebounds. We also drove significant margin expansion in earnings growth for the enterprise, which led to strong cash flow generation. This allowed us to invest in the business, strengthen our balance sheet for future strategic growth opportunities, and return capital to our shareholders. I'd like to take a minute and thank all of our contributors for all they did this year. We have an exceptionally talented team that's stepped up and turned challenges into successes. I'm proud of what we've accomplished together and look forward to the exciting future we have ahead. Speaking of talent, I also want to welcome Tayfun Uner to our leadership team as Head of our Light Duty segment. Tayfun brings tremendous experience to the organization and his new role completes our transition to three distinct segments. With leadership structures in place now for each of them,…

Thanks, Kevin. I'd like to echo your comments regarding the team. It was a particularly strong finish to what ended up being an outstanding year and we couldn't have done it without the efforts of our contributors across the organization. So I just wanted to thank our contributors for their hard work and dedication. Turning to slide eight, let me dive into our results. Consolidated net sales in the fourth quarter were $534 million, up 8% year-over-year, driven by strong customer demand. As Kevin mentioned, light duty drove above market sales growth in the quarter given positive macro trends in our new product initiatives. In fact, innovation was a key contributor to our success across each of our segments in the quarter. I'll cover them individually in just a moment. Adjusted gross margin for the quarter was 41.7%, a 240 basis point increase compared to the prior year period. This margin expansion was primarily driven by higher sales performance and cost savings generated from our supplier diversification efforts as well as our productivity and automation initiatives. Additionally, margin benefited from a favorable mix of higher sales of new products and greater leverage on volume growth. Adjusted SG&A expense as a percentage of net sales was 24.2%, adjusted operating income was $93 million for the fourth quarter, up 23% compared to the same period last year. Adjusted operating margin expanded 210 basis points to 17.5%, largely from gross margin improvement. Finally, fourth quarter adjusted diluted EPS was $2.20, up 40% compared to the prior year period. Along with increased adjusted operating income and lower interest expense, our effective tax rate benefited from one time discrete items in the quarter. Finally, our share repurchase program activity during the year contributed to positive EPS growth. Next, let me provide updates on each of…

Thanks, David. As we look forward, I'm confident in our model for long term success. We'll continue driving innovation and building on our industry leading portfolio of innovative solutions. We'll continue to build deep relationships across our diverse end markets leverage our operational expertise and capitalize on strategic growth opportunities to drive Dorman's future growth. On behalf of our management team and the Board, we thank you for your support. With that, I would now like to open the call up for questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Scott Stember from ROTH MKM. Sir, please go ahead.

Good morning, and thanks for taking my questions.

Thanks, Scott.

Good morning, Scott.

Regarding tariffs, which is obviously one of the bigger topics these days, could you just remind us how far you've come, at least with exposure related to China? I know that I think we were less than 50% total Asia exposure, and maybe as of last year. Could you talk about where we stand right now? And then under the current 10% the tariff on China, I'm just trying to get a sense of how manageable that is for you in the near-term.

Sure. Scott, it's Kevin. Good question. As you point out, the situation remains very fluid. I mean I think we've obviously seen the additional 10% on China imports in the steel and aluminum tariff. We would characterize those two aspects of tariffs is very manageable for us at this point. But obviously, the situation is very fluid. And it seems like the reciprocal tariffs, we'll know a lot more about those in the months ahead. I will speak a little bit about the diversity actions that we've taken and that I've spoken about publicly before, we -- I will remind you that we have a lot of experience dealing with tariffs. We have a playbook back in 2018, since that time frame, we have undertaken a lot of actions to diversify the supply chain. In 2025, Scott, we estimate that roughly 30% or so of our purchases will come from the U.S. Whether that's from a partner manufacturer or from dormant manufacturing facilities. Roughly 30% to 40% of our sourcing in 2025 is estimated to come from China. And then outside of that, we're very diverse around the globe. I'll also say, Scott, that our exposure to Canada and Mexico from a sourcing perspective is immaterial.

Scott, it's David. The other thing to keep in mind is from a -- we're on FIFO accounting, right? So you'll see the impacts as inventory turns probably about 2 times, so you'll see that six months after we actually incurred as well.

Got it. That's very helpful. Thanks. And then on the heavy duty side, can you talk about some of the early signs that you're seeing and then maybe talk about the channel expansion opportunities there?

Sure, Scott. Good question. It's Kevin again. I would say, in general, if we look at the heavy duty market, our business is basically tracking with the market. We'll characterize it as somewhat stabilized. As we said in our prepared remarks, we're not really calling for a market turnaround in 2025. And it really is unclear how the trade situation will impact the overall heavy duty market. So our focus in that sector is going to be to continue on focusing on new products. We had a record year in terms of new product launches in 2024. We expect to increase on that in 2025. So the new product engine is really working well. We've got to get that flywheel primed and going and eventually that's going to become a very large growth engine for us, particularly as the market does recover. We're also focused on productivity initiatives across the business in heavy duty. And as we mentioned in the prepared remarks, we're expecting flattish sales growth for that segment in 2025.

Got it. And then just last question. You talked about the pipeline for M&A. Could you maybe just give us an indication of where you're seeing more opportunities than where we could look for you guys to potentially go?

Well, I mean, yes, Scott, it's Kevin. Good question. The pipeline, I would say, is very robust really across the three segments. But I will say that in the last couple of months, it's gone a little bit quiet with all the trade uncertainty. I think once that clears up, we'll start to see some good activity across our funnels.

Got it. That's all I have for now. Thank you.

Thanks, Scott.

Thanks, Scott.

Thank you. Our next question comes from the line of Gary Prestopino from Barrington Research. Please go ahead.

Hey, good morning, all.

Good morning, Gary.

Good morning, Gary.

Kevin, I just -- I have a question just on the whole heavy duty market. I mean, I understand that it's a choppy environment out there and all, but are most of your products going into this market for repair and is there just a real big diminishment of on the road trucking going on here or are truckers just putting off repairs? I'm just trying to get an understand of what is driving this market to perform as poorly as it has.

Yes, it's a great question, Gary. And I think you're exactly right. I think the overall market is down. We're seeing that across all the freight indexes that we look at. And our parts, as you correctly point out, do primarily go for repair, and we are seeing delayed repairs across the channels that we operate in.

Okay. So I guess just from my understanding on this, is there if the truck is not drivable, they've got to repair it, but is there some kind of delayed maintenance kind of repairs that are needed that they're just putting that off?

Yes. And that happens quite often in this industry, Gary. And I think what you'll see is when the market does start to inflect, you'll start to see a lot of those delayed repairs start coming back online. So we're -- when that inflection happens, we expect a pretty robust ramp back up.

And could you remind me in a normalized market for both Specialty and heavy-duty or just however you want to phrase it, what would be the target operating margins that you could attain or segment margins for both of these?

Yes, Gary, the margins -- yes, it's David. That's a good question. No, it's okay. We don't give guidance on forward guidance, Gary, on segment margins. But we think that as we look forward, what's included in the guide is margin performance pretty consistent with where we are in 2024.

Yes. It's Kevin. Let me add to that. I mean, the reason that we're not forecasting in the guide a big increase in 2025 is obviously we're not forecasting the growth. In normal environments, you're talking about high teens type margins in specialty vehicle. And although we're currently performing well below that in heavy duty, our target there is to get to mid-teens operating margin.

Okay. Yes, that's what my question revolved around just in a normalized market. So there's plenty of upside once these markets do turn-in the affirmative?

Absolutely correct.

Okay. Thank you.

Thank you. Our next question comes from the line of Justin Ages from SJS Securities. Sir, please go ahead.

Hi, good morning, all.

Good morning.

Going back to -- there was a question on the M&A pipeline, but given the strength in balance sheet and strong free cash flow, can you give us a little indication on capital allocation priorities between share buybacks and M&A and debt paydown?

Yes, Justin, good question. It's David. Yes, the -- we had a strong year from a cash flow perspective. If you look at our strategy, first area that we look at is debt and where we stand on debt and leverage. And then our latter takes over from there. First area we look at is internal investment. We get our best growth there, best returns, M&A is second and then third is returning cash to shareholders and we do that opportunistically. We paused the buybacks in the Q4 given some of the uncertainty around the election and geopolitical concerns. But we're committed to it. In fact, the Board of Directors approved a share repurchase plan of $500 million that was effective January 20 -- January 1 of this year. So that's how we look at the capital allocation, Justin.

All right. That's helpful. Thanks. And then moving to Specialty, you talked about the year-over-year sales growth in the quarter. Just wondering if you could give a little more detail on in Specialty Vehicle repair versus discretionary and the consumer kind of sentiment that you talked about there?

Yes, it's a great question. It's Kevin. I'd say overall, the market in Specialty Vehicle was down for 2024. There were certainly some signs of new vehicle sales stabilizing and inventory in the channel stabilizing. But ultimately, inflation and high interest rates are going to continue -- have kept a new machine acquisition prices fairly high, which impacts us. I talked publicly about that in the past. Hence, our focus on non-discretionary repair parts, something that they were special -- Super ATV was under indexed at the time of acquisition and channel expansion. We've made a lot of progress on both those fronts, which enabled us to outperform the market in the quarter and for the year in 2024. And we believe we took some decent market share. It's unclear about when the market is going to recover fully, particularly with the trade uncertainty now on top of that. And we are expecting, again, modest growth in 2025 for the segment.

All right. Thanks. I appreciate you taking the questions.

Got it. Thanks.

Thank you. Our last question comes from the line of Bret Jordan from Jefferies. Sir, please go ahead.

Hey, good morning, guys.

Good morning, Bret.

Good morning, Bret.

Good morning. Could you talk about the margin profile of complex electronics within light vehicle? Is that a meaningfully higher margin or in-line with the category?

Hey, Bret, it's Kevin. Good question. We don't typically break out the margin profile of segments within our business segments, so product categories. I will tell you that the overall segment has performed very well when you talk about complex electronics. It certainly outgrew the overall business in 2024. And we continue to predict that will happen going forward. The margin profile is strong. I mean, typically, as I said in the past, those products have a high balance of new to the aftermarket. So when that product gets launched, the only competitor that we have in this space would be the OE. So in those cases, typically that's where we have the highest margin profile. And we have the highest competitive moat, right? So with the technical difficulty of a lot of these parts, we typically have a lot more new to the aftermarket and we're exclusive for a lot longer in complex electronics.

Okay. And then I guess on the big picture question on the light vehicle side, what do you see as the underlying inflation rate and pricing this year? Obviously, ex-care off, but rates have stayed high, so factoring costs are up, what would you think you will see the POS for inflation?

Yes, that's a good question, Bret. And obviously, the elephant in the room is the tariffs, right? So I can't really predict what's going to happen there given it's so fluid at the moment. Let's assume there were no tariffs. I would say you're probably in that very low single one-ish type percent. Because there has been some general inflation outside of tariffs as we move through 2024.

All right, great. Appreciate it. Thank you.

Got it.

Thank you. That concludes our conference call. Thank you for joining today, and you may now disconnect.